(Mainly) Political Musings from "Sudbury" Steve May, Officer of the Nickel Belt Greens.

Wednesday, April 12, 2017

Cap and Trade Paints Liberals into a Corner

The results are in – and it’s good news for Ontario’s Liberal government . The Cap and Trade carbon auction out-performed the expectations of many who have been closely following Premier Kathleen Wynne’s marquee carbon pricing initiative. Sales were brisk - $472 million was raised from the auction, and at $18 per tonne of carbon, allowance prices exceeded expectations (see:“Ontario sells $472 million of allowances in first cap and trade auction,” CBC News, April 3, 2017).

Perhaps burdened by the knowledge that next year will see auction money fleeing Ontario when our carbon market is linked with California’s, Glen Murray, Minister of Environment and Climate Change, tempered the giddiness by reminding us that the real success of Cap and Trade will be measured by the amount of emissions reduced. The Minister is right, of course – and that’s a huge problem for the Ontario Liberals, because Ontario’s Cap and Trade scheme is ultimately doomed to fail.

The problem is that Cap and Trade paints the Liberals into a corner that they can’t get out of on their own. The Cap part of the program is a great idea. We know that we have to aggressively lower emissions if we are to keep our Paris climate commitment of holding global warming to just 2 degrees Celsius. A hard cap will limit industrial greenhouse gas emissions, with the plan being to lower the limit every year. If you do that, you reduce emissions, problem solved.

Unfortunately, aggressively lowering the cap creates several new problems. It drives up the cost of purchasing allowances. That $18 per tonne allowance is a real cost to businesses and industry – one they’ll pass along to consumers in the form of higher prices. And that makes a lot of voters angry.
Higher costs make domestic businesses less competitive than those based in jurisdictions that haven’t priced carbon pollution. This could lead to real job losses in trade-exposed industries. And that makes a lot of voters angry.

At $18 a tonne – the equivalent of adding about 4 cents a litre to the price of gasoline – Cap and Trade costs are not a significant burden to consumers. But we know that Justin Trudeau’s federal government has been talking about having a $50 per tonne price in place by 2022. That’s equivalent to a little over 11 cents on a litre of gasoline. And that’s still not enough. The International Energy Agency estimates that by 2040, we’ll need to be taxing carbon at US$120 per to achieve our Paris commitments. That’s almost 27 cents on top of the price of a litre of gas! (see: “Here’s how much carbon pricing will likely cost households,” MacLean’s, October 11, 2016).

That’s the corner that the Liberals find themselves in. Meaningfully lowering emissions can only be accomplished through Cap and Trade by driving up prices, causing consumers to rebel and businesses and industries to flee the province. Who really expects decision makers that have to face voters once every four years to pull off that kind of stunt?

The only way to make carbon pricing work is to make sure consumers are insulated from rising prices, and businesses are protected from foreign competition. The provincial Liberals could address the first point by making their carbon price truly revenue neutral by giving all collected fees back to individuals in the form of dividend cheques. Their federal cousins could address the second point by ensuring that imported goods produced with carbon prices are subject to border tax adjustments, leveling the playing field for domestic goods (see: “What Glen Might Be Saying if He Understood,” Dr. David Robinson, Economics for Northern Ontario, December 3, 2016).

Neither Liberal government appears to understand how to achieve Minister Murray’s measurement of success for carbon pricing: a real reduction in emissions that will help Canada meet our Paris climate commitment. The Ontario Liberal’s Cap and Trade scheme simply can’t get us there.

(opinions expressed in this blog are my own and should not be interpreted as being consistent with the views and/or policies of the Green Parties of Ontario and Canada)